The benefits to firms and individuals of co-operating with the FSA

Doing business with the FSA
- Being regulated
  - Enforcing the Law
    - Enforcement in focus

The basic standard of cooperation

1.1 The starting point is that firms are required to cooperate with the FSA. This requirement is set out in the Principles for Business. Principle 11 states:

“A firm must deal with its regulator in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.”

1.2 In addition to this, individuals who are approved persons must also comply with the Statements of Principle and Code of Practice for Approved Persons. Principle 4 mirrors Principle 11 of the Principles of Business. Principle 4 states:

“An approved person must deal with the FSA and with other regulators in an open and cooperative way and must disclose appropriately any information of which the FSA would reasonably expect notice.”

1.3. These Principles establish the minimum degree of cooperation that firms/individuals should provide to us. However, for firms/individuals to receive credit for cooperation, there has to be evidence of proactive cooperation.

1.4. Remember that we have limited resources, and that a firm/individual knows its business better than anyone else. So we are inclined to give credit to those who assist us in unravelling potential misconduct and who help us conduct our enquiries quickly and efficiently.

1.5. As well as giving credit to those who cooperate, we have introduced a scale of discount to penalty for early settlement relating to investigations which started after 19 October 2005. This is dealt with under Discounts for early settlement and is distinct from penalty adjustments which are given to reflect cooperation. Examples of the types of cooperation by firms/individuals giving rise to an adjustment to the penalty imposed, and the factors we take into consideration, are set out below.

How can firms/individuals cooperate?

1.6 When deciding whether to take disciplinary action, and if so, when determining the appropriate sanction, one of the factors that we will take into account is how cooperative the firm or individual is.

1.7. So what do we mean by cooperation? How can a firm proactively cooperate? It is impossible to give a definitive answer to these questions, but the sorts of things that may be relevant include:

(1) How quickly did the firm/individual notify the regulator? Did it bring the issue to the attention of the regulator at the earliest opportunity?
(2) What action did it take once the problem had been identified? What did the firm/individual do to investigate the nature/source of the problem?
(3) Did the firm/individual do everything that it could to fix the problem once it was found? Did it instruct independent third parties to carry out a review? What is the likelihood of the conduct recurring?
(4) What steps did the firm/individual take to find out whether customers had been financially disadvantaged? How promptly did it pay redress to consumers?
(5) Did senior management actively and meaningfully participate in the efforts to address and remedy the issue?
(6) Did the firm/individual quickly agree the facts and actively seek to agree a basis on which enforcement action could be concluded?
(7) Did the firm/individual respond promptly to our queries and requests for information? Did the firm voluntarily provide material and/or information we did not directly request and of which we might otherwise not have been aware?
(8) Did the firm/individual communicate the lessons learnt to the appropriate staff?

What are the benefits of cooperation for firms/individuals?

1.8. There are no hard and fast rules about how credit is given for cooperation and we consider each case on its merits. There are instances where Supervision staff have not referred matters to Enforcement because of the firm or individual's response. To illustrate this point:

Case Study 1

After undertaking an internal review of transaction reporting across its businesses, a firm reported incidents of misreporting to the FSA. The firm's review revealed that it had reported client trades to us without underlying client information. On discovering this, it took extensive action, including:

establishing business unit task forces to immediately address the issues arising from the internal review;
improving controls to stop non-compliant reporting happening again; and
engaging an external third party to review reporting requirements and to ensure the firm shared relevant information with its other businesses.

Our Supervision division held discussions with Enforcement, checking the details of the case against the Enforcement Referral Criteria (ERC). Although, on balance, we agreed that formal enforcement action could have been a suitable regulatory response, we decided this was not the most appropriate action available to us at that time. The key factors in deciding not to use enforcement were that the firm had:

voluntarily informed us of its misreporting breaches;
already undertaken an internal review;
proactively undertaken full and immediate remediation action;
upgraded and implemented appropriate systems and controls; and
its misreporting was partial in nature i.e. client trades had been reported but underlying client information was missing.

Supervision and Enforcement agreed that the firm's breach of transaction reporting rules warranted a private warning. This is a more serious form of reprimand than we would usually make during ongoing supervisory correspondence. A private warning requires us to identify and explain our concerns about a firm’s conduct and/or procedures, and tells the subject of the warning that we have seriously considered formal disciplinary measures.The private warning meant the firm fully appreciated its failings and confirmed the FSA requirements it must adhere to. It also told the firm that we might take its transaction reporting failures into account in certain circumstances, such as when deciding on future approvals or whether to bring disciplinary action against it in relation to any future breaches.

Case Study 2

The firm established that one of its international desks was maintaining an account in the name of an individual with links to an alleged fraudster. The firm’s internal and external auditors conducted a review which identified no evidence of money laundering. However, the firm's review raised concerns about specific transactions on other relationship-managed accounts, as well as the supervision of accounts generally. The firm reported the matter to us as soon as it identified the concerns.

Our Supervision division held discussions with Enforcement and checked the information from the firm's review against the Enforcement Referral Criteria (ERC). Although, on balance, we agreed that formal enforcement action could have been a suitable regulatory response, we decided this was not the most appropriate action available to us at that time.

The firm agreed to a review by an external third party at its expense, agreeing its scope with us. It covered the effectiveness of systems and controls across other high-risk desks and the adequacy of the processes and control environment based on industry standards. Where necessary, the review put in place a programme to remedy any deficiencies. This resulted in the firm fully appreciating its past failings and their consequences. At the same time, it provided the blueprint for changes within the firm to ensure the risks these issues had posed to our Statutory Objectives were effectively mitigated.

The key factors in our decision not to use enforcement were that the firm:

reported it as soon as it identified the issue;
appointed external advisers to help assess the issue;
engaged fully with us in scoping the work to be carried out by external auditors; and
agreed to undertake appropriate remediation/remedial work.

1.9. However, there may be circumstances where the misconduct is so serious that no amount of cooperation or other mitigating conduct can justify a decision not to bring any enforcement action at all.

1.10. In most cases proactive cooperation is likely to result in reduced charges or lighter sanctions being sought.

Case Examples

1.11. If a firm/individual receives credit for its degree of cooperation, e.g. a reduction in the level of the fine, this is reflected in the final notice. The press release is drafted from this.

1.12. Here are some quotations from past press releases:

(1) “Whilst the failings in this case merit a significant financial penalty, the FSA has recognised that the failings have been mitigated by the firm.”
(2) “The fine would have been much higher if the firm had not cooperated with us by overhauling its advertising approval procedures and offering the 455 investors who responded to the advertisement their money back.”
(3) “The FSA considers that the firm’s conduct following the identification of the contravention by the FSA is a model type of cooperation and acceptance of responsibility by senior management which is desired by the FSA, and which consumers deserve.”
(4) "The firm has agreed to appoint an independent third party to review its procedures for approving and monitoring financial promotions and to carry out any remedial action arising out of that review. It has also now appointed a full-time compliance officer. Were it not for this positive action, the penalty would have been higher".

1.13. The steps taken by the firm described as providing the “model type of cooperation” included:

(1) the positive response of senior management once the problem was identified, including active involvement in ensuring customer files were properly reviewed;
(2) combining its compliance arrangements with that of its parent company;
(3) immediately conducting a comprehensive review of its compliance arrangements;
(4) instructing independent reporting accountants to conduct a sample review of its sales to establish whether policies had been mis-sold, and as a result, whether customers had lost out;
(5) asking the reporting accountants to assess more widely its compliance function, including its management reporting systems;
(6) accepting the findings of the sample review;
(7) taking steps to ensure that redress would be paid where due; and
(8) where there was any confusion or doubt as to whether a customer was mis-sold, it erred on the side of the customer.